The property market offers various investment opportunities. Whether investors are looking to diversify their portfolio, grow their wealth or secure financial stability, there are numerous investment opportunities available. House hacking, for instance, is one option that allows homeowners to increase their monthly cash flow. The rental income generated by renting out part of a property helps pay for various housing expenses including the mortgage.
Here is a detailed overview of house hacking and its benefits.
What is House Hacking?
House hacking is a real estate strategy, which refers to buying a property and renting out part of it to generate a rental income. This reduces housing and property expenses such as mortgage payments or maintenance costs. Real estate investors can benefit from the house hacking technique on both long-term and short-term basis.
Here are some tips for house hacking.
How to House Hack
For a successful house hacking experience, follow the steps below.
Figure Out the Financing
Budgeting is the most important component of house hacking. Investors must explore the available options for home loans in Dubai, Abu Dhabi, Sharjah and more before deciding to invest in a property. This will give them an idea of mortgages in Dubai and other Emirates and allow them to make an informed decision.
Expats looking to invest in a property for house hacking should also look into expat home loans in the UAE and choose the one that best fits their needs. Once selected, compile all the necessary documents and apply for the loan.
Once the finances are organised, investors can start looking for properties in their desired area.
Find The Best Property
Depending on the budget, choose a property to invest in. Location is a critical component in house hunting. The location of the rental property must attract tenants. Availability of businesses, public transport, schools and other amenities nearby are also essential to get tenants. The choice of neighbourhood will also influence the type of tenants that a property attracts.
Homeowners who wish to rent out their primary residence can rent out finished basements, spare bedrooms, accessory dwelling units and more. Tenants and landowners can cohabitate without invading each other’s privacy.
Rent Out Rooms
Homeowners with spare rooms can rent out a room in their primary residence for an additional income. It is the easiest method of house hacking as it does not require any additional investment such as purchasing a property. Renting out individual rooms allows landlords to generate additional income that can be used to pay off other expenses.
However, it also means compromising on privacy and sharing the living space with the tenant. Common spaces such as the living room and kitchen will be accessible to both the landlord and the tenant. This may lead to conflict if not managed properly.
Multi-Unit Properties
Investing in a duplex can be a wise choice as it allows the landlord to live in one unit while renting out the other. Since multi-unit properties have a separate kitchen, entrance and living room, landlords will not have to compromise on privacy. Renting out entire units also generates higher rent as compared to individual rooms.
However, keep in mind that buying multi-unit properties will require a higher initial investment and may require higher repair costs.
Short-Term Rentals
Renting out part of a property for short-term rentals is a profitable house hacking tip. Investors owning properties in tourist-friendly areas can take advantage of this lucrative strategy to generate hefty rental income. Tourists typically choose short-term rentals for their vacations. These rentals have higher nightly rates, especially in peak season which can increase the landlord’s income. It also allows owners to reserve the property for personal use when needed.
Accessory Dwelling Units (ADUs)
Accessory Dwelling Units are a great house hacking opportunity as they offer tenants their own living space. ADUs refer to an additional unit that can be attached to the main property or a structure on the property. These units are especially attractive to tenants who are looking for a private living space or a single-family home.
However, these units also require a hefty initial investment to build the structure. But once done, they can generate large amounts of rental income and add value to the property.
Take a look at these properties for sale in the UAE and choose the property of your choice for house hacking.
Run The Numbers
Once the property and the finances are finalised, run a detailed analysis to understand whether the property is worth the investment. Estimate the approximate cost of property expenses including the monthly mortgage payments, repair and maintenance costs, utilities and insurance. Now compare this cost with the potential rental income to calculate the monthly cash flow. A positive cash flow indicates that the homeowners can pay all their property expenses with the rental income without having to pay from pocket. This shows that the investment is worthwhile.
Make Necessary Repairs
After finalising the property, it is important to ensure that the property is ready to house tenants. Take a good look at the property and make any necessary repairs and updates. The extent of repairs may depend on rentals. Spare bedrooms may require fewer repairs if they are part of the household whereas ADUs or multi-unit properties may require more updates depending on their condition.
Find a Tenant
It is now time to start searching for a good tenant. Set a minimum criterion for tenants such as checking the credit score or income-to-rent ratio and stick to the criteria. Screen all potential tenants to ensure that they fit the tenant checklist and run background checks. Lastly, review all applications to select the best tenant and sign an agreement.
Benefits of House Hacking
House hacking can be a great investment opportunity and bring in large profits if done correctly. Some of the various benefits of house hacking are as follows.
Reduce or Eliminate Your Housing Cost
Generating an additional income in the form of rent can heavily decrease the housing cost of the homeowner. The rental income can be used to pay off the mortgage or any other expenses associated with the property. For multi-unit properties, by renting out all but one unit, landlords do not have to worry about the mortgage as the rent will pay for it.
Gain Flexibility
Homeowners with a changing lifestyle or those who travel regularly for work or leisure can gain flexibility with house hacking. For instance, in case the homeowner has to move out of the city, they can rent out the unit temporarily or long-term – depending on the situation – and earn a rental income.
Mitigate Risk
House hacking enables homeowners to minimise risk when investing by dividing the costs of insurance, maintenance and other costs associated with home ownership. This allows homeowners to reduce the overall housing cost and build equity rather than spend money on rent.
Ease into Your Rental Property Career
House hacking enables homeowners to rent properties for the short term. These short-term rentals allow homeowners to ease into their rental property careers by learning how to be good landlords. This experience will allow them to quickly learn new skills required to manage and maintain rental properties.
Common House Hacking Mistakes
Investors must know how to safeguard their investment once they have acquired the title. Here are some common mistakes investors need to avoid.
Picking an Undesirable Neighbourhood
Choosing a neighbourhood that does not attract tenants is the biggest mistake one can make when house hacking. Make sure to invest in a neighbourhood that will bring in profitable rents and attract multiple tenants. Neighbourhoods with public transport, retail options and other amenities and facilities are a good option.
Ignoring Local Ordinances
Be sure to check the local zoning ordinances when planning on making changes to the property. Changes such as adding a unit, adding parking space, building tall fences and more may result in legal actions against the buyer.
Forgetting to Budget for Repairs
When taking out a budget for house hacking, make sure to keep an amount aside for any repairs the property may require. Not keeping a budget aside for emergency situations such as appliances breaking down, roofs collapsing etc. will cause severe issues. Taking out a set percentage of every month’s rent for repairs is a good way to safeguard the property in case of emergencies.
Not Taking Landlord Duties Seriously
Having a good tenant-landlord relationship is important, but it should not interfere with landlord duties. Landlords should communicate their expectations clearly and set boundaries with the tenants. Landlords should not be lenient when doing their duties such as collecting rent timely, conducting maintenance and evicting tenants when necessary.
FAQs
Is house hacking a good investment?
House hacking can be a great way to generate additional income and eliminate housing expenses. It is a good investment opportunity if done strategically.
What property types are best for house hacking?
Multi-unit properties such as duplex, triplex or fourplex are suitable for house hacking. Houses with finished basements, ADUs and spare bedrooms are also great for renting out.
This is all about house hacking. This real estate side hustle is a great opportunity to make a rental income by renting out part of the property that homeowners already reside in. Paying off the property mortgage, reinvesting in another property and expanding one’s investment portfolio becomes easier with this strategy.
Keep an eye on new projects in the UAE for your next investment opportunity.
Stay tuned to dubizzle’s property blog for more tips and tricks.
